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June 12, 2018

I wish they wouldn’t land those things here while we’re playing golf....

Mint - Blain’s Morning Porridge

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.

What joy to be back at my desk after two weeks sailing round the Atlantic coast of La Belle France.

I spent most of yesterday playing email catch-up. Looking at the numbers… dull.. but the graphs show I missed some fun and excitement.. I understand it’s been…noisy? This week we’ve got lots of stuff like the Federal Reserve (going to hike), the European Central Bank (going to dither (I think)), and lots of data. But is anyone listening? Instead.. it’s all about the big picture (whatever that means…)

Step back from the news screens for a second. What does it all mean? Geopolitics deserves serious and critical examination – growth potential is tied to understanding shifting policy, international agreements and co-operation on trade, infrastructure, and all the other stuff the strategic relationships between nations are likely to generate in terms of economic consequences. These consequences determine the business environment and power growth. It’s critical stuff.

Instead, geopolitics has become something akin to a television reality show – fascinating in the present, and instantly forgotten. I suppose it’s the way of the world these day. Markets crave short-term stimulus! Show us the next new new thing! Then, let expectations bias dominate the thought process as the financial media and blogosphere take the most negative outlandish viewpoint and build a story around it…

I suppose we should be impressed that markets were unfazed by the breakdown of G7 last weekend. Around 30 percent of the global economy has been left wallowing in indignation (including hopes on new trade agreements) after Trump’s Twitterstorm. No one seems bothered that the alliances that have dominated the last 70 years of growth broke down in acrimony in Quebec. Mothers against Canada says it all. Maybe there is some bizarre synchronicity at play – it was the Quebec Conferences of 1943 and 44 that set the plans for post-war Europe and ultimately winning the cold war. The world has moved on.

Forget solutions like G7+1, or G20. Who really cares what a bunch of Sherpas have agreed as a communique months in advance? We’re into a new era. It’s the end of occidental age. Look to the East, and Trump pushing, prodding and upsetting everyone to make America more like its Asian trading partners. The real message of geopolitics is start putting the blocks together rather than just skipping to the next event.

Ultimately, that’s why we’ve all been glued to the gogglebox this morning watching Trump meet Kim. (If I hear “historic moment” once more, I shall thcream and thcream.) Sure, it’s important, and I guess we’ll know how it went later today when the Air Force 1 Twitter Storm hits. The upside is significant. Not only might we avoid war, but it will confirm Korea as a pre-eminent top table nation and the wisdom of the Asia US pivot.

It’s a wake up and smell the coffee moment for broken Europe… and Canada (which will have to pick its friends carefully…)

And, what of Europe? This week it’s all about what the ECB will say about the Taper, and in the wake of weak data I won’t be in the least surprised to see the can kicked down the road as they watch the data.

Last week was all about Italy, and this week everyone is happy because the Italians aren’t being as naughty as they might have been, and they don’t want to exit the euro. (Apparently.) Berkley Square in London seems to have been the major beneficiary of the Italian wobbles – playing short-term games shorting BTPs and playing spreads. Well done, but it’s hardly rocket science. They were able to make such spectacular profits because the market let them…

The bottom line is Italy should not be a three-week volatility/spread wonder! Italy should not only worry markets whenever they have an election, or a new government (which is, to be fair, more often than most.) In a world where populism is still a deciding factor, then, again.. wake up and smell the espresso! Italy should be a permanent flashing red beacon screaming Danger, Danger. It’s the unsustainable canker at the core of Europe. (And, if that’s not a good example of expectations bias, then what is?)

However, we’ve always known Italy was the weak link.. so let’s not overreact. But, when the Americans are flexing their economic muscles, and aggressively playing trade games, and Asia is growing at pace, how long can Europe continue with the euro experiment? This week the US rate hike is nailed on as a result of strong growth, strong employment and on target inflation (moderately over). In contrast, Europe looks to be slowing again. The ECB will have no choice but to be cautious, measured, data-dependent, and make sure it continues to give well signposted guidance. While the economy is progressing at a pace sufficient to justify a measured slow taper…Europe can only move at the pace of its slowest member… Italy, Italy, Italy!

Meanwhile, reading through about a billion pages of analysis and commentary yesterday a few gems flashed up, which I happily share:

“Look out for lots of noise”

“Low volume rallies that don’t move the needle”…

“Complacency is off the charts”

Out of time… and back to the day job.. (or at least trying to catch it!)